In 2013, we ran a detailed household survey in Cape Verde. We were interested in studying how access to finance influences the behaviour of beneficiaries in the labour market. Microfinance generally aims at fostering self-employment, but most of the businesses financed through it are very small and, hence, they rarely involve all household members. If within a household there are unemployed members, the fact that another member is able to start or improve a petty business through a microloan, can affect the household's total income and hence influence the incentives of the unemployed to search for jobs.

In a recent paper, we study this phenomenon in details. We developed a simple model in which household members make collective decisions about consumption. There are investment opportunities available but, to take advantage of them, households need a loan since they are poor. At the same time, some household members may be unemployed and looking for work. In general, relaxing credit constraints changes the investment opportunities available to households and improves their livelihood. But, how does improved access to credit affects the incentives to search for work facing the unemployed labourers?

Our model shows that the impact of improved access to credit on search intensity by the unemployed is ambiguous, as it is affected by two competing effects. Having access to finance may raise search intensity, as it increases the return to the household's net-worth. In fact, by finding a job, the unemployed worker can contribute to the investment with her/his salary and hence reduce the size of the loan. This reduces the cost of finance and raises the household's net-worth.

But, at the same time, unemployed individuals in households with better access to finance enjoy a positive income effect that lowers the incentive to search. In fact, the investment has a positive return and allows for larger household aggregate consumption.

Which effect dominates depends on within-household bargaining power. We prove that when the bargaining power of the unemployed member is high the positive net-worth effect is relatively stronger and, hence, improved access to credit is more likely to raise search effort by the unemployed. Intuitively, when household members pool resources and make decisions collectively, the share of consumption each member can enjoy depends on her/his power to influence decisions. This is an easily testable prediction for our data, which contains detailed information on labour search behaviour of unemployed individuals.

We find robust support for the model's predictions. We use variables such as gender, schooling achievements, household size and the role in the household as exogenous proxies for individual bargaining power. As predicted by the model, these controls influence significantly the effects of improved credit access on individual job search intensity: access to microfinance lowers search intensity among unemployed workers with low bargaining power, but increases search intensity among unemployed workers with high bargaining power.

Overall, our results suggest that the behaviour of unemployed household members is affected by access to credit in a non-trivial way, potentially undermining the positive effects of microfinance. This implies that when poorly targeted, access to finance programs can lower the incentives to search for a job, making the overall impact on welfare ambiguous. To improve the impact of microfinance on labour market outcomes, the screening of beneficiaries should not be solely based on characteristics of the entrepreneurial activity and of individual borrowers, but also on characteristics of the households they belong to. In particular, the within-household distribution of decision power is fundamental. We have proposed some simple indicators of bargaining power that are easy to measure and scrutinize. If used to improve targeting, they can improve the impact of access to finance, generating positive externalities in terms of labour market outcomes.

Not so long ago the international development community felt it had found an answer to Africa's long-standing poverty problem: the microcredit model. Many microcredit programs were launched in the 1990s with the aim of reducing poverty by promoting a local microenterprise development trajectory that would transform Africa 'from below'. Sadly, this movement was getting underway in Africa just as elsewhere around the world it was becoming clear that microcredit did not work as it is supposed to do, and that almost the entire argument in favour of microcredit was actually built on 'foundations of sand'.

Most recently, a team of some of the most reputable evaluation specialists in the world reported on a number of studies they had carried out these past few years using the supposedly more accurate Randomised Control Trial (RCT) methodology, and the central finding they came to was that there is essentially no impact from microcredit. The conclusion was sobering indeed, noting "The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators" (Banerjee, Karlan and Zinman 2014: 17 - italics added).

However, support for the failed microcredit model did not evaporate away completely. The microcredit industry has been kept alive by 'shifting the goalposts'. Instead of supplying microcredit to the poor in order to address poverty and under-development, developing countries - and especially African countries - were now instructed to promote microcredit programs as part of the much wider objective of achieving 'financial inclusion'. Today, the international development community claims the key to development is to provide to stakeholders easy access to a microcredit, a bank account, a credit card, a mobile phone-enabled payment facility, and so on.

The awkward problem here, however, is that the evidence base to support the effectiveness of financial inclusion, according to me, is by all accounts even thinner than the evidence base previously mobilized to support the failed microcredit model.

First, in my view, there are virtually no reputable studies that have been able to causally link financial inclusion and 'more microcredit' to positive local impact and sustainable development. Instead, most studies simply use the availability of microcredit (and other financial services) as the acid test of whether or not financial inclusion programs have been successful. This, of course, is confusing a mere operational metric with impact. Moreover, second, it is extremely worrying that in all of those countries where it is universally agreed that financial inclusion has indeed proceeded fastest and deepest - notably Mexico, Peru, Bangladesh, Bosnia - the subsequent explosion in client over-indebtedness has proven to be a hugely damaging development, and not just for the poor but for everyone.

To look into the future of financial inclusion in Africa, it helps to examine the experience of the undoubted pioneer in this area: South Africa. After the collapse of apartheid, the feeling in the international development community was that the most glaring of the many inherited problems in post-apartheid South Africa - notably very high unemployment and low incomes in Black South African communities - could be resolved by a significant extension in the supply of microcredit and a major uptick in the level of individual entrepreneurship. After a shaky start and even a minor 'meltdown' of the microcredit sector in 2002, the microcredit promotional effort had to be re-launched under the more appealing 'financial inclusion' heading. And this time an even bigger positive development impact was envisaged. So what happened? Sadly, as I have explained at length elsewhere, the exercise was pretty much a calamity for South Africa's poor.

The first problem was historical. Under the apartheid regime most genuine high-profit business opportunities were reserved for the white South African community, with black South Africans only permitted to establish a range of trivial informal sector activities supplying the simple items and services that others in their community needed to survive. This fact centrally meant, however, that there was likely to be very limited scope for many new informal microenterprises to flourish in the immediate post-apartheid period. And this is exactly what happened. A tiny number of net jobs were created thanks to newly established microcredit programs, largely because new entrants simply took business from incumbent already struggling micro-businesses, which led these incumbents to shed jobs or else to close down as a result. Many of the new entrants also failed quite quickly. Overall, the additional competition induced by microcredit led to reduced turnover and margins across the entire microenterprise sector, and also put pressure on local market prices, all of which helped lead to a massive 11 per cent real decline in self-employment incomes between 1997 and 2003.

Second, as the majority of the poor began to realise that there was no real opportunity to survive in a micro-business, they inevitably turned, cynically one might say, to using microcredit as simply a way to provide for their immediate consumption needs, perhaps hoping to repay their microcredit sometime in the future through a financial windfall or from some other means. But the microcredit institutions were only happy to oblige - at least initially - because they could set interest rates very high (60-80% annually), and the majority of microloans could be forcibly repaid through garnishee orders, pressure on borrowers, and collateral seizure. Anyway, rapid growth, which funded high salaries and bonuses in the short term, was far more important to the managers of the main microcredit institutions than their own institution's long-run survival. By 2012 as little as six per cent of the total volume of microcredit advanced in that year was actually used for business purposes. All told, this trend plunged South Africa's poorest into unimaginable levels of debt peonage which, as reported by Statistics South Africa in 2014, involved "More than 9 million South Africans - half the national labour force - (...) battling with over-indebtedness and many are taking out more credit to pay off debt, thereby digging themselves deeper into penury."

Finally, the rapid expansion of the financial inclusion project in South Africa has undoubtedly resulted in scarce financial resources being channelled out of the most important high(er) productivity uses, and into the very least productive trivial ones, such as petty retail trade. Many of the private banks 'downscaling' into microcredit openly admitted to having mobilized additional financial resources by curtailing their existing lending programs to the formal SME sector. As a result, the informal microenterprise sector has boomed of late thanks, among other things, to the (over) supply of microcredit, while the formal SME sector - the most important sector in terms of growth and the technological upgrading of the local economy - has languished because of a lack of affordable capital. Even worse, what little growth that has been registered in the formal SME sector has largely been in the no-growth quick-turnover services sector, such as security guards and cleaners.

Summing up the anti-developmental paradox that has emerged in South Africa is the current Minister of Trade and Industry, Rob Davies, who has pointed out that, "[t]he (South African) economy is characterised by extensive financialisation, but only a small percentage of investment is channelled towards the productive sectors." South Africa's experience with the financial inclusion concept has been a catastrophe. One can only hope that important lessons are learned by the many other countries in Africa heading, or being led, down the very same path, and that alternative community-based financial institutions with a very good historical record of local development success across many countries, such as credit unions, financial cooperatives, cooperative banks and local/regional state-led development banks, are much more strongly encouraged in the future.

Milford Bateman is a freelance consultant on local economic development, since 2005 a Visiting Professor of Economics at Juraj Dobrila at Pula University, Croatia, and since 2013 Adjunct Professor of Development Studies at St Marys University, Halifax, Canada. He is currently based at UNCTAD working mainly on issues of local finance and local agro-industrial policy in Ethiopia.

The views expressed in this article are those of the author and do not necessarily represent the views of Making Finance Work for Africa.

In the past decade, a group of key empirical studies have argued that a lack of education and financial knowledge can lead individuals to miss opportunities to benefit from financial services. Some may fail to save enough for retirement, others may over-invest in risky assets, while still others miss out on tax advantages, fail to refinance costly mortgages, or even remain outside of the formal financial sector completely. These studies suggest that such behavior is based on the reality that making financial decisions has become increasingly complicated. At the same time, as a result of sweeping changes in the economic and demographic environments, individuals have become increasingly responsible for their own financial decisions and the consequences of such decisions over the long-term. Changes in public pension plans, an increase in life expectancy, and an increase in the cost of health insurance have placed on the individual the weight of momentous decisions such as whether to take out private retirement insurance, or how much to save. Easier access to credit, a general increase in the accessibility and complexity of products and services, and a number of other factors make a range of financial decisions more consequential - and harder.

Governments, financial services providers, and related stakeholders have responded accordingly in recent years developing financial education programs and initiatives, but the results have been mixed. The bulk of the evidence available confirms that, in general, the level of financial literacy throughout the world is very low, especially among the more vulnerable groups: those with very low education or income such as senior citizens, young women, and immigrants. The lack of financial literacy within these groups has proven to extend beyond economic effects and produce negative consequences on health, general well-being, and life satisfaction. Many of the programs that have been introduced were part of empirical studies that evaluated the impact of financial education programs on subsequent financial behavior. There are many such studies that show that financial education improves financial decision-making.

Nevertheless, a body of work has opened an intense debate over whether financial education and information can truly affect the financial behavior of individuals (see here, and here). In many cases, despite the availability of financial education, persistently high rates of debt and default, and low rates of saving and financial planning for retirement have been shown to persist. The empirical evidence obtained from surveys and experimental work often shows that individuals pay little attention to the information and that their capacity to process it is limited. Most of the empirical literature to-date indicates that traditional financial education - clients receiving information in a classroom style setting or through printed materials - does not necessarily translate into behavioral changes, especially in the short-term.

However, this research also showed opportunities in the way financial education information can be transmitted, particularly, methods that factor in psychological aspects such as individuals' cognitive biases are key to transforming financial behavior over the long-term. The existing information is often excessive and tough for individuals to process completely. These studies concluded that in order to improve individuals' financial decision-making ability, the financial decision-making process must be simplified, and barriers for processing information must be reduced. For example, this might take the form of narrowing the number of options available or delivering text messages that may influence behavior at key moments. The latter falls within a group of practices identified as behavioral "nudges" by organizations working with behavioral science, like ideas42. In short, current research indicates that with financial education, effectiveness is largely a question of taking into account the psychological makeup of individuals.

In fact, nowadays there is a broad consensus among psychological, social, and economic studies that cognitive characteristics affect social and economic behaviors. Notwithstanding this, these studies tend to conclude that cognitive characteristics only predict a small part of personal behavior. Non-cognitive or personal characteristics seem to have a role as significant as that of cognitive skills. B.W. Roberts, a leading personality psychologist, defines¹ personal characteristics as "the relatively enduring patterns of thoughts, feelings, and behaviors that reflect the tendency to respond in certain ways under certain circumstances." Psychologists have sketched a relatively commonly-accepted taxonomy of personal characteristics known as the Big Five: Openness to Experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism. The papers² of J. Heckman, T. Kautz, and their research team (2013) review the recent evidence obtained by economists and personality psychologists regarding how cognitive and personal characteristics can be used to predict educational attainment, labor market success, health, criminality, and financial decisions.

Interestingly, these studies show there is hard evidence that both personality and cognitive characteristics are not "set in stone" and can change over the life cycle. Specifically, while genetics have a significant influence, parents, education, and social environments shape individuals, especially in the early years. However, there is some evidence that personality traits are more malleable than cognitive characteristics at later ages.

Financial education intervention programs should thus be based on these results. In particular, measuring personal characteristics makes it possible to identify people who tend to show weaker financial habits - high rates of debt, high default, low rates of long-term savings, etc. - and design tailored interventions. In addition, researchers conclude that most successful intervention programs are not as effective as the most successful early childhood programs. Consequently, as changing behaviors is not simple, teaching healthy financial behaviors from an early age allows the foundations to be laid for the development of strong lifelong money management.

Given the importance of these factors in effecting change, here are a few points that the research suggests would help financial education become more effective in supporting adults and older people.

Personalized counseling

Opportunities to gain experience by putting lessons into practice A focus on small changes in financial behavior, taking into account the individual's disposition to change

Programs that acknowledge the individual's socioeconomic situation

Continuing and ongoing education, support, and motivation

As factors that influence behavior are increasingly understood, a major challenge remains to incorporate those features into the design and delivery of financial education programs.

María José Roa is Researcher in the Economics Department at the Center for Latin American Monetary Studies, CEMLA (www.cemla.org). Her research is mainly on economic growth, financial inclusion, behavioral finance, personality psychology in economics, and financial education. She has been teaching for almost 20 years in different universities around the world. Her work has appeared in refereed international journals. She coordinates the Financial Inclusion and Education Program in Central Banks at CEMLA, and she is member of the Research Committee of the OECD/INFE. She is originally from Madrid, Spain, but she lives in Mexico City.

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